Reading the FOMC's Taper Tea Leaves

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Aug. 21 (Bloomberg) -- Deutsche Bank's Carl Riccadonna, FusionIQ's Barry Ritholtz and BofA Merrill's Ethan Harris discuss the release of the minutes from the July 30-31 meeting of the Fed's policy-setting Federal Open Market Committee. (Source: Bloomberg)

Co-head of global economics research, senior economist at deutsche bank and our closer and director of equity research.

Carl, rick, and don, your interpretation of frankly a very middle of the roger goodell fed commentary.

This was a very noncommittal fed meeting.

The question we have to ask ourselves is, what do they know and when did they know it?

They didn't have the last unemployment data that showed the .2 decline in the employment rate.

They didn't have the latest inflation numbers and they didn't see the latest round of housing statistics which also showed that the housing sector is proving to be fairly resilient in the face of higher interest rates.

There is a healthy debate at the fed, no question about it, barry, the only question right now is a september taper.

Is that a done deal?

You know, as the old man on the panel, i have to point out that early in my career, you got none of this.

Look at the amount of detail and transparency.

The more transparency, the less we know.

That's exactly right.

You would find out did the fed do something last month?

You wouldn't find out until weeks later with the tiny increments.

The market had already figured out what was going on.

You saw what was happening in bond prices and yields.

To answer your question, the bond market certainly looks like it's anticipating, if not an imminent taper, sooner rather than later sometime this year, september, october, november, it doesn't really matter.

It's coming.

Remember, you're buying these 20-year bonds or 10-year bonds, not for what is happening today or tomorrow, for the long haul.

So, yes, we'll get a taper and we'll probably get it before these long-term bonds are mature.

Ethan harris, economist at bank of america and mench lynx, as you look at the data, the recent data has been stronger.

What is your take?

I think the recent data has been mixed.

I think we have had weak industrial production.

We have had the payroll employment numbers were weak.

If you look at the market reaction to the employment report, yes, the unemployment rate came down with every single other number in the report was weak.

This was a weak report.

So the new information the fed has on growth, it's actually slightly disappointing.

On the inflation front, they had a weak p.p.i., weak import prices, weak wages and small increase in core inflation.

It's a mixed picture.

A mixed picture doesn't mean you taper.

You wait to get clarity in the data.

It's too early.

In the context that you can view here, he was one of the most bearish economists on wall street with his forecast.

Carl, push back.

That being said, since we had the latest round of data and the industrial production numbers were impacted by the weather.

It wasn't quite as weak, not great, i'll agree to that.

More importantly, since this fed meeting of which we're reading the minutes now today, we have heard some several dovish monetary policymakers.

They have all said that they are willing to consider tapering at the september meeting.

They're moving in that direction.

We have to wait to see the employment report, the next employment report.

Ok, go ahead.

The debate is not about whether they're going to taper or not.

We agree they're going to taper.

We think they'll do it in december instead of september.

It's when.

When they go in the september meeting, they're coming out of a july meeting where they should have been prepping us for tapering.

They should have been saying we're getting closer, ready to go, instead it's the same line they have always had, later this year.

Last time i checked, there are three more meetings this year.

Why is september the month?

There is nothing in this directive that tells us september.

The reason, ethan, the one data point you left off which arguably is the most important one jobs, 4.7% unemployment rate.

That's the lowest we have seen in a while.

200,000 jobs have been created over the past months.

The fed is specifically targeting jobs.

Yeah, that is the case.

The job market has improved.

They're getting, obviously getting closer to tapering.

Again, if i'm at the fed, at the meeting right before the one i'm going to make the big decision, you can feel the gravity turn.

It didn't turn at this meeting.

Keep in mind, to me the most signature enough can't fed point is we will have a new fed cup chairman next year and uncle ben wants to set everything up for his successor.

So before he leaves -- you think he would make a move to do that?

I think he wants to give them the flexibility to do what they want to do afterward.

Also, but that doesn't mean tapering.

That means letting them do what they want to do.

If he starts tapering, he is setting us up for more tapering.

Anything he does will dictate the next step of the fed.

The last thing he wants to do is change policy around the new fed chairman.

He wants them to come in and have a fresh slate.

He is not setting them up.

What you're saying, ethan, either wants the data, he, ben bernanke, wants the data to be so conclusive that he must begin tapering, or he is going to push this thing out until next year and let the new guy work it out.

Adam, there are two points here.

He wants the taper to be done by the time the unemployment rate gets to 7%. let's suppose we get another unemployment report, 6.5 for the rate hike.

For the taper to end, he suggested 7%. we're going to be there pretty darn quick.

There is some need to do that.

If he waits until it's absolutely necessary, he won't have this two-lever policy where they're pushing off interest rate hikes, expectations of forward guidance and at the same time tapering.

Go ahead, ethan.

It says right in the minutes that the fed members were worried that people would take this 6%, 7% number too literally.

7% is a broad indicator.

They're saying we will end tapering when the broad economy improves that and that could be consistent with a 7% unemployment rate.

They're not elevating unemployment to be the only indicator they're looking at.

I think we need to see broad-based, solid g.d.p., solid library market and end q.e. they're not going to do it because of weird movements in the unemployment rate.

One of the issues, we'll give the last word to you, barry, the labor force participation has dropped.

So that unemployment rate may be actually skewed as a weakness.

Look, you have the baby boomers retiring.

There are a lot of other secular trends underlying that.

The participation rate has been falling since 2004. it's hard to say that's what is driving unemployment down.

Bottom line is like everything else in this post-credit crisis economy, the data is slowly torturously incrementally improving.

Nothing to right home about.

Slow and gradual.

Bumpy.

Which means we have no change in policy.

A very spirited debate, that's what we like here.

Barry, you are staying with us.

There is nothing like a good tapering discussion to get us all worked up here on a wednesday afternoon.

We're just getting started on "street smart." get your shopping lists out,

This text has been automatically generated. It may not be 100% accurate.

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